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Swortwood v. Empresas

United States District Court, S.D. California

March 6, 2014

DONALD R. SWORTWOOD, as Trustee for the Donald R. Swortwood Trust Dated July 7, 1995, et al. Plaintiffs,
v.
TENEDORA DE EMPRESAS, S.A. DE C. V. a Mexico corporation, et al. Defendants.

ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFFS' MOTION TO COMPEL PRODUCTION OF DISCOVERY [ECF No. 64]

BARBARA L. MAJOR, Magistrate Judge.

Currently before the Court is Plaintiffs' December 27, 2013 motion to compel production of discovery [ECF No. 64 ("MTC")], third party Neology's January 10, 2014 opposition to Plaintiffs' motion to compel [ECF No. 69 ("N. Oppo.")], Defendant Tenedora de Empresas, S.A. DE C.V.'s ("Tenedora") January 10, 2014 opposition to Plaintiffs' motion to compel [ECF No. 71 ("T. Oppo.")], Plaintiffs' January 17, 2014 Reply to Tenedora [ECF No. 73 ("Reply to T.")], and Plaintiffs' January 17, 2014 Reply to Neology [ECF No. 74 ("Reply to N.")]. For the reasons set forth below, the Court GRANTS IN PART AND DENIES IN PART Plaintiffs' motion to compel production of discovery.

FACTUAL AND PROCEDURAL BACKGROUND

Plaintiffs filed their complaint in this matter on February 13, 2013 [ECF No. 1], an amended complaint on March 22, 2013 [ECF No. 22 ("FAC")], and a second amended complaint on September 10, 2013 [ECF No. 51 ("SAC")]. This case concerns the shareholders' sale of their stock in Neology to Smartrac on December 21, 2011. Id. at 4. Plaintiffs, who were holders of the Series A and C Preferred Stock of Neology, allege that they "were entitled to receive, prior and in preference to any distribution to the holders of Neology's Common Stock, predetermined fixed distributions from the proceeds of the Sale, " but that Defendant Tenedora ordered the conversion of all Series A and C Preferred Stock into Common Stock at the sale closing. Id. at 4. This action served to eliminate Plaintiffs' liquidation preferences, did not conform with Neology's Certificate of Incorporation, and allowed Tenedora to increase its share of sales proceeds at the expense of Plaintiffs whose share of proceeds from the sale decreased by $2.7 million. Id. at 5. Plaintiffs allege that Tenedora's actions breached its fiduciary duties to Plaintiffs and damaged Plaintiffs "in an amount not less than $2, 638, 203 and up to $3, 259, 545." Id.

On December 18, 2013, counsel for both parties and Neology jointly contacted the Court regarding a discovery dispute brought by Plaintiffs concerning Defendant's assertion of the attorney-client privilege in response to some of Plaintiffs' discovery requests. ECF No. 60. During the call, the parties represented that Plaintiffs would receive a privilege log from Neology, Inc. on December 23, 2013 and be prepared to file their motion to compel on December 27, 2013. Id . In light of that representation, the Court found it appropriate to set a briefing schedule. In accordance with that schedule, Plaintiffs filed a motion to compel on December 27, 2013 [MTC]. Defendant and Neology filed timely oppositions on January 10, 2014 [T. Oppo. & N. Oppo.] and Plaintiffs filed two replies on January 17, 2014 [Reply to T. & Reply to N.]. Having reviewed the briefing submitted, and for the reasons set forth below, Plaintiffs' motion is GRANTED IN PART AND DENIED IN PART.

DISCUSSION

The instant discovery disputes concern 557 documents responsive to Plaintiffs' Requests for Production ("RFP") that were withheld by Defendant due to attorney-client privilege, 116 documents responsive to Plaintiffs' document subpoena that were withheld by Neology due to attorney-client privilege, "additional relevant attorney communications" that were identified, and privileged communications that took place between Defendant and its counsel and between Neology and its counsel that Plaintiffs allege are subject to the fiduciary and crime-fraud exceptions to attorney-client privilege. MTC at 2.

A. Defendant's Privilege Log

Plaintiffs argue that Defendant's privilege log improperly lists documents as being subject to the attorney-client privilege. MTC at 13. Specifically, Plaintiffs argue that Defendant improperly asserted the attorney-client privilege as to the following categories of documents: (1) communications between Neology and Neology's counsel which Defendant received from Neology's attorneys, (2) communications from Defendant's attorneys to Neology representatives, (3) communications between Defendant's counsel, Neology's counsel, and various client representatives, and (4) communications between Defendant's counsel and Smartrac (the purchaser of Neology) and Smartrac's attorneys. Id. at 13-15.

Defendant contends that the presence of both Defendant's counsel and Neology's counsel does not automatically waive the attorney-client privilege as Plaintiffs suggest. T. Oppo. at 11. Defendant explains that the confusion regarding the applicability of the privilege stems from the fact that Mr. Alejandro Diez Barroso acted in two different capacities: as a director of Neology and as a representative of Defendant (a Neology shareholder). Id. at 10-11. Defendant agrees with Plaintiffs that conversations between Neology attorneys and Mr. Diez Barroso are not privileged when "Diez Barroso is [communicating] in his capacity as [Defendant's] representative." Id . However, Defendant contends that communications between Neology's attorneys and Mr. Diez Barroso when he was communicating in his capacity as a director of Neology are privileged.[1] Id. at 11. Defendant contends that the privilege remained in place even when Mr. Fernando Elias-Calles, Defendant's attorney, was involved in the conversations as "Mr. Elias-Calles advised Mr. Diez Barroso in his capacity as a Neology Director, in conjunction with Neology's lawyers." Id . Defendant agrees that conversations between Defendant's attorneys and Smartrac (before the merger) are not privileged and will consider producing them, but note that Plaintiffs have not identified any documents that meet this criteria. Id. at 11-12, fn 5.

Plaintiffs respond that Defendant cannot protect communications on behalf of Neology. Reply to T. at 2. Plaintiffs argue that "Neology must defend its own privilege" and that Defendant "lacks standing to do so." Id . Plaintiffs further respond that Defendant has not established a separate attorney-client privilege relationship between Mr. Elias-Calles and Mr. Diez Barroso and that bringing Mr. Elias-Calles into a communication also brought Defendant into that communication and destroyed any attorney-client privilege. Id. at 4-5.

The dispute between Plaintiffs and Defendant is governed by Delaware law.[2] Under Delaware law, the attorney-client privilege protects the communications between a client and an attorney acting in his professional capacity where the communications are intended to be confidential and the confidentiality is not waived. Moyer v. Moyer , 602 A.2d 68, 72 (Del. 1992). The privilege serves "to foster the confidence of the client and enable[s] him to communicate without fear in order to seek legal advice." Riggs Nat'l Bank v. Zimmer , 355 A.2d 709, 713 (Del.Ch.1976). In Delaware, the scope of the attorney-client privilege is set out in Rule 502 of the Delaware Rules of Evidence. Rule 502 states that a communication is privileged if made in confidence:

for the purpose of facilitating the rendition of professional legal services to the client (1) between the client or the client's representative and the client's lawyer or the lawyer's representative, (2) between the lawyer and the lawyer's representative, (3) by the client or the client's representative or the client's lawyer or a representative of the lawyer to a lawyer or a representative of a lawyer representing another in a matter of common interest, (4) between representatives of the client or between the client and a representative of the client, or (5) among lawyers and their representatives representing the same client.

Del. R. Evid. 502(b). The rule also extends to the protection of confidential communications involving counsel for separate clients so long as the clients share a "common interest" sufficient to justify invocation of the privilege. Metro. Bank & Trust Co. v. Dovenmuehle Mortg., Inc. , 2001 WL 1671445, *5 (Del. Ch. Dec. 20, 2001).

1. Communications Between Neology's Counsel and Mr. Diez Barroso

Defendant correctly states that communications between Neology's counsel and Mr. Diez Barroso when Mr. Diez Barroso is communicating in his capacity as a Neology Director are protected by Neology's attorney-client privilege, provided the communications are intended to be confidential and the confidentiality is not waived. T. Oppo. at 10-11;N. Oppo. at 12. The existence of this privilege, however, does not give Defendant the right to assert the privilege. Under Delaware law, the attorney-client privilege may only:

be claimed by the client, the client's guardian or conservator, the personal representative of a deceased client or the successor, trustee or similar representative of a corporation, association or other organization, whether or not in existence. A person who was the lawyer or the lawyer's representative at the time of the communication is presumed to have authority to claim the privilege but only on behalf of the client.

Del. R. Evid. 502(c). Here, Neology, not Defendant is the client. Defendant is not Neology's guardian or representative and, therefore, cannot claim the attorney-client privilege on behalf of Neology. In addition, the fact that Defendant is in possession of Neology's allegedly attorney-client privileged communications indicates that the communications are not privileged as the communications have been shared with individuals or entities not covered by the privilege.[3]

Defendant cannot assert a privilege on behalf of Neology. Accordingly, Plaintiffs' request to compel these documents is GRANTED and Defendant is ORDERED to produce communications between Neology's counsel and Mr. Diez Barroso, which are in Defendant's possession, unless the communications are only between Neology's counsel and Mr. Diez Barroso, relate to Mr. Diez Barroso's role as a Neology director, and Mr. Diez Barroso has maintained the confidentiality of the documents.

2. Communications Between Mr. Elias-Calles and Neology employees

Defendant argues that communications between Defendant's attorney, Mr. Elias-Calles, and Mr. Diez Barroso when he was acting in his capacity as a Neology director are privileged because "Mr. Elias-Calles advised Mr. Diez Barroso in his capacity as a Neology Director, in conjunction with Neology's lawyers." T. Oppo. at 11. Defendant argues that it is "not unusual" for a Director of a company to have separate counsel to advise him on issues relating to the directorship, in conjunction with the company's corporate counsel. Id . While this may be true, in this case, Defendant has not provided any evidence indicating that Mr. Diez Barroso retained Mr. Elias-Calles to represent him individually in his role as a Neology Director. Rather, all of the evidence[4] presented to this Court indicates that Mr. Elias-Calles was employed by Defendant and represented Defendant. As such, any communications between Mr. Elias-Calles and a Neology employee, including Mr. Diez Barroso when he was acting as a Neology Director, are not privileged.[5] ...


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